The calm after the storm often allows reflection, and in this case, many FX industry participants are now considering the reshaping of the industry’s landscape after Thursday’s high volatility caused by the sharp appreciation of the Swiss franc against the Euro.
Switzerland’s central bank took an unannounced decision to remove the 1.20 floor on the EURCHF pair, which shocked the market, many traders and the vast majority of FX companies and dealers.
Thus far, the Swiss National Bank has not been called into question as to how it was able to make such a decision without consulting the government, or without a time-consuming consultation with various parties, which would have given prior warning.
Aside from the points made in the LeapRate editorial last week in that Switzerland always remains independent and thus does not have to consult the European Parliament or wait for direction from it on any matter whatsoever, as it is not a member and is completely independent, Switzerland may well be covering itself in the advent of a collapsing euro and unsustainable EU debt, which it does not want to be party to.
There is another very important factor to consider in this, and in order to do so, the consideration must shift from European political conditions to corporate structural makeup.
The Swiss National Bank is completely different from any other central bank of any other nation, in that not only is it the issuer of sovereign currency to a completely independent and financially strong nation, but it is largely a private institution in its own right.
Most central banks are effectively government departments, whether issuing sovereign currency to an independent nation, or part of a federation, thus are subject to the procedures and rules that would apply to any other government department should a new ruling be ready for approval.
Simply, the Bank of England or Federal Reserve cannot just push through a new ruling immediately with no forewarning, as they would have to go to senior government level hearings and have it approved by central government.
In Switzerland, the ownership structure is completely different in that the Swiss National Bank is 45% owned by private shareholders, the majority of whom are private individuals rather than corporate conglomerates, whereas the remaining 55% is owned by the cantons of Switzerland. The cantons are the regions which make up the nation, but are segregated into Italian, French and German regions with local administrations.
Indeed, if LeapRate’s editorial on Sunday has drawn an accurate conclusion about the potential reason as to why the Swiss National Bank took this decision regardless of consequences to FX firms and negative client balances overseas, considering the ownership structure would allude further in that direction, in that shareholders of what is effectively a national currency issuer are concerned about any further devaluation of the euro and unserviceable eurozone debt and thus are safeguarding their business interests.
For Switzerland, this structure ensures security for the national economy in that the burden on taxpayers is minimal as the central bank is run partially as a private organization, and additionally the central bank will clearly do anything it can to retain financial strength, as it is possible for it to go bankrupt, unlike government-owned central banks overseas which, it could be argued, have a less critical remit to ensure profitability and efficient operations and are more concerned with social stability, thus will take risks in order to bail out flagging economies or print money to ease deflation/inflation.
Switzerland’s central bank does not operate in that fashion, and relies on a strong national economy and efficient, cost effective operation and no interference from non-aligned banks from abroad.
Incumbent Chairman of the Swiss National Bank Thomas Jordan toes the line exactly on this basis. Mr. Jordan, who joined the Swiss National Bank in 1997 as an economic adviser before becoming Chairman in 2012, is regarded within the institution as a champion of price stability, and has indicated that the bank will act again in a similar manner if necessary.
In the case of the Swiss National Bank, being master of its own destiny is most advantageous.